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Market Mechanics:
A Guide to U.S. Stock Markets
release 1.2
Although the inner workings of the stock market are fas-
cinating, few introductory texts have the space to describe them
in detail. Furthermore, the U.S. stock markets have been chang-
ing so rapidly in recent years that many books have not yet
caught up with the changes. This quick note provides an up-to-
date view of how the U.S. stock markets work today. This note
will teach you about:

• The functions of a stock market;

• Stock markets in the United States, including Nasdaq
and the NYSE;
Associate Professor of Finance
• The difference between limit and market orders;
McDonough School of Business
• How stock trades take place; and
Georgetown University
• Lots of other interesting tidbits about the stock market
that you wanted to know, but were afraid to ask.
Market Mechanics: A Guide to U.S. Stock Markets


What a Stock Market Does most productive opportunities are. These signals channel

The stock market provides a mechanism where people capital to the areas that investors think are most produc-

who want to own shares of stock can buy them from peo- tive. Finally, the financial markets provide important risk-

ple who already own those shares. This mechanism not management tools by letting investors diversify their

only matches buyer and seller, but it also provides a way investments and transfer risk from those less able to toler-

for the buyer and seller to agree mutually on the price. ate risk to those who can better tolerate risk.

Note that when you buy shares in a publicly traded compa-

ny such as Microsoft, you are not buying the shares from What Happens When You Place a
the company itself. You are buying the shares from anoth- Stock Order?
er investor who already owned the shares. This is what One way to understand the stock market better is to

economists call a secondary market for shares. explore the process of trading a stock step-by-step.
Suppose that you wanted to buy 500 shares of a common

This is different from the primary market in which the stock. In this example, we will use the mythical firm

company sold the shares directly to investors in the first Company ABCD Inc., whose ticker symbol just happens to

place. The initial public offering (IPO) occurs when the be ABCD. In order to buy this stock, you have to find

company first sells shares to the public and arranges for someone willing to sell you the shares. If your cousin or

the secondary trading of its shares. your next-door neighbor wants to sell you the shares, that
is fine. There is no law in the United States that requires

Financial markets perform a number of vital economic an individual to go through a registered broker in order to

functions in our economy. First, the primary market pro- buy or sell shares of stock. However, most of the time

vides promising companies with the capital they need to investors need help to find the other side of the trade,

invest in growing their businesses. Second, financial mar- which is what brokerage firms do. (And most brokerage

kets provide investment opportunities to investors. Third, firms won’t sell you shares in nonexistent firms, but that

stock prices provide important signals about where the neighbor might!)

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For a simple retail order, the investor tells the brokerage What this information says is that the last reported trade
firm what he or she wants to do. This can be done in per- in ABCD stock took place at $18.85. Right now, the best
son, over the phone, through the mail, or via the Internet. bid is also $18.85, which means that someone is willing to
For example, you might click on your broker’s web site and pay $18.85 for up to 10,400 shares of ABCD. If you owned
find a screen that looks like this: this stock and wanted to sell it immediately, you could sell

Market Orders up to 10,400 shares right now at that $18.85 price. The ask

On this page, you enter what you want to do – in this case, price (sometimes called the offer price) indicates that

buy 500 shares of ABCD. So far, so good. But at what someone is trying to sell up to 1,000 shares of ABCD at

price? If you want your broker to get you the stock fast at $18.88. If you wanted to buy immediately, you could buy

the best price available at the moment, you would place a up to 1,000 shares at $18.88. Thus, a market order to buy

market order. What price are you likely to get? You can 500 shares would likely be filled at a price of $18.88. The

find out before you place the order by getting a quote that difference between the bid and ask price is known as the

shows the current bid and ask prices. For example, the bid-ask spread, and represents part of the cost of trading

quote for ABCD might look like this: stock. Another way to remember the difference between
bid and ask prices is to think of the bid price as the price
Bid price: $18.85 > Bid size: 10,400 you get when you “trade-in” the stock and the higher ask
Ask price: $18.88 > Ask size: 1,000 price as the price you pay when you buy something at the
{Last trade: $18.85} retail price.

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Reading the Stock Table


If $18.88 is acceptable to you, you might go ahead and

place a market order and would probably get it filled at
$18.88. Of course, if someone else snaps up those 1,000
shares before your order arrives, the price you get could be
slightly higher. Conversely, you will sometimes get a bet-
YTD % CHG: The stock price percentage change for the calendar year-to-date,
adjusted for stock splits and dividends over 10%. ter price than you expected, called "price improvement," if

52 WEEKS HI LO: The highest and lowest reported prices in the last 52 weeks.
someone willing to sell at a lower price shows up just as
your order arrives.
SYM: The "ticker" symbol, an abbreviation that uniquely identifies the stock.
Brokerage firms and markets usually use these abbreviations to make sure that
there is no confusion about the security in question, because many stocks have
similar sounding names.
Limit Orders
On the other hand, suppose that you are willing to be
DIV: The annual dividend expected to be paid by the firm.
patient and think that you might be able to get a better
YLD %: The annual dividend divided by the share price as a percentage. price. You could tell your broker the maximum price that
PE: The PE is the Price-Earnings ratio, which is calculated by dividing the clos- you are willing to pay, in which case your order is called a
ing stock price by the latest 12 months of earnings, if the company had positive
earnings. The PE is a quick "back-of-the-envelope" measure of how expensive limit order, because you have placed a limit on what you
the stock is compared with its current earnings. Generally, investors are willing are willing to spend. You would also tell your broker how
to pay more for stocks with good prospects for future growth, and such stocks
therefore have higher PE ratios. long the order is valid. A day order expires at the end of

VOL 100s: The reported share volume in lots of 100 shares.

the normal trading day. A good-’til-canceled order does
not expire until you cancel it, although many brokers will
LAST: The last reported price from the regular trading day, which currently ends
at 4:00 p.m. automatically cancel such orders if they are not filled with-
in 30 or 60 days.
NET CHG: This shows the difference between the most recent closing price and
the closing price for the day before.

For example, you could place a limit order to buy 500

shares of ABCD at $18.50 per share. Such an order is less
than what others are willing to pay right now, so it would
YTD 52 Weeks 52 Weeks SYM DIV YLD% PE VOL(100s) LAST Net not be filled immediately. If, however, the market price
came down a bit, this order might get filled. On the other

+12.4 28.15 9.50 (ABCD) 1.00 5.31 35 12,345 18.85 0.44

hand, if the price goes up, then the order may never be
-2.5 37.95 29.25 (OPQR) 0.60 1.20 13 5,678 32.55 -0.80
filled. This is the trade-off with a limit order: you might
get a better price by being patient, or your order may
never get filled at all.

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Trade Execution The Nasdaq Stock Market gathers the quotes from all of

Well, placing an order is one thing, but what happens next? these market participants, both market makers and ATSs,

Your broker is under a legal obligation to make sure that and displays them in the Nasdaq quote montage. The

you get the best execution for your order. If ABCD is listed quotes from the individual participants can be viewed on

on The Nasdaq Stock Market®, your broker can send the the Nasdaq Workstation. Nasdaq also provides systems

order to a market maker, an order-matching facility called that link all of these participants together, so that your

an alternative trading system (ATS) or an electronic com- broker can route your order electronically to a market

munications network (ECN), a regional stock exchange, or, maker or ECN, and so that other participants can also

if the firm has order entry authorization, directly into the trade with each other electronically.

Nasdaq trading systems. Market makers are businesses

that make a living by buying stock when others want to Typically, your broker decides where to send your order.

sell, and by selling when others want to buy. Just like a Some brokers, called direct access brokers, allow you to

shopkeeper, they often keep inventory on hand to provide choose how your order will be processed. Most individu-

their customers with immediate service. They make their als, however, let their brokers do the work of choosing how

money by buying at the low bid price and selling at the to process the order.

higher ask price, along with profits and losses on the

inventory that they hold. Because the average bid-ask At any given time, several market makers may be quoting

spread on a Nasdaq National Market® stock is less than the best price. In addition, other market-making firms

five cents, one market maker describes his business as one often guarantee that they will match the best price, what-

of “picking up nickels and dimes in front of the steam ever it happens to be at that moment. How does your bro-

roller of rapidly changing stock prices.” There are over 300 ker choose where to send the order? Like other business-

market-making firms in the Nasdaq® market. Some mar- es, market-making firms compete not only on price but

ket-making firms make markets in only a few select stocks, also on other factors of execution quality, such as the speed

and others make markets in thousands of stocks. Many of of filling orders, accuracy of those orders, and quality of

these market-making firms also have retail brokerage and customer service (when problems do arise). Some market

investment banking operations, and the market-making to makers will not only agree to match the best price, but also

support these other business lines. The average Nasdaq to trade in larger sizes than the best quote in the market,

stock has over 10 market makers competing for business in the so called "depth improvement." Some large brokerage

that stock, and many of the largest stocks have over 50 firms are vertically integrated and act as market makers as

market makers. well as brokers. They feel they can serve their customers
faster and with less chance for error by filling the orders in-

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What is an ECN?
You may have heard a lot about ECNs and the Nasdaq marketplace. ECN
stands for electronic communications network, a facility that matches cus-
tomer buy and sell orders directly through a computer. There are several ECNs
within the Nasdaq market that compete to provide the best service for their
customers. The rise of ECNs demonstrates how the open architecture of the
Nasdaq marketplace allows innovative firms with different technologies to
compete in trading stocks.

ECNs accept orders directly from their own subscribers in addition to customer ABGX ADBE ADCT ADLAC ADRX ALTR AMAT AMCC
orders routed from other brokerage firms. Suppose a customer (or his or her
broker) submits an order electronically to buy 100 shares of ABCD at $18.75
per share. The ECN would display this order in its computer system. ECNs let
their paying subscribers see their entire order books, and some, like Island and
Archipelago, display their order books on the web. The ECNs also display their Snapshot of ECN Book for ABCD
best bid and offer orders (the top of their order book) in the Nasdaq quote
montage so that other market participants can see them. BUY ORDERS SELL ORDERS
1,000 18.83 3,800 18.90
1,000 18.80 1,600 18.90
1,000 18.80 1,000 18.90
5 18.75 1,000 18.90
500 18.75 1,000 18.90
700 18.75 100 18.90
80 18.75 1,500 18.90
600 18.75 200 18.90
1,000 18.75 5,000 19.00
11 18.75 420 19.00
In this example, the ECN would add the order to buy 100 shares of ABCD at 100 18.75 500 19.00
$18.75 per share to its book. If another person wanted to sell those shares at 580 18.75 100 19.00
$18.75, he or she would electronically submit an order to the ECN to sell the 370 18.75 300 19.00
shares at $18.75. The ECN then matches the buy and sell orders, and the trade 385 18.60 100 19.00
is complete. ECNs make their money by charging fees to people who trade 250 18.60 500 19.00
using their systems.

To the right is an example of the order book in ABCD from a typical ECN: house (matching, of course, the best price in the market)
Note that there are orders to buy ABCD at $18.83, the ECN’s best bid, and to and not sending the order out to another market maker. In
sell ABCD at $18.90, the ECN’s best ask price. These are not necessarily the best
prices in the whole market, just the best prices in the book of that particular this way, they can earn not only brokerage commissions,
ECN. The ECN then transmits its best bid and offer into the Nasdaq quote but also any trading profits. The competition between mar-
montage so that all market participants, not just the ECN’s subscribers, can see
the best bid and offer quotes in the entire market. ket makers for orders is so intense that some market mak-
ers even share part of their trading profits with the broker-
There are several ECNs in the Nasdaq market. The two biggest are Instinet,
owned by Reuters, and Island. Other major ECNs include Archipelago, REDI- age firms that send them orders, a practice often referred to
Book, Bloomberg, and Brut. As with the exchanges themselves, there is likely to
be considerable consolidation among ECNs, and ECNs themselves may apply for as “payment for order flow.”
exchange registration. For instance,
in November 2001, Archipelago
Percent of Nasdaq
and REDI-Book announced an
Share Volume 2001
Your broker has a legal obligation to get you the best pos-
intent to merge under the name
ECN sible execution for the trade and will weigh a variety of
Archipelago, less than one month
after the SEC approved Instinet 13.30%
these factors in choosing where to send your order.
Archipelago’s application for Island 8.80%
exchange status. Altogether, REDIBook 4.10% Sometimes the brokerage firm routes the order to the mar-
about one-third of Nasdaq’s vol- Archipelago 2.30%
ume passes through ECNs. Some ket maker or alternative trading system (ATS), such as an
B-Trade 1.80%
people erroneously think that ECNs Brut 1.70% ECN, that is displaying the best price. Some firms find it
have "taken" this volume from Attain 0.20%
Nasdaq. However, by giving Nextrade 0.20%
more efficient to route all orders in a given stock to a sin-
investors additional ways to trade,
Market XT 0.10%
ECNs have actually added signifi-
GlobeNet 0.00%
cantly to the trading volume in
Total 32.50%
Nasdaq-listed stocks. 5
Source: Nasdaq

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gle market maker who promises to match the best price at (DTCC) so that settlement can take place after the trade,
the moment rather than try to chase after the market currently on the third business day thereafter (or "T+3").
maker who just happens to have the best price at the
moment, because those shares may be gone before the What if you wanted to trade a stock that was not Nasdaq-
order gets there. listed? Then a different, but still similar, process is used.
Suppose you wanted to buy 500 shares of a stock listed on
What if you place a limit order instead of a market order? the New York Stock Exchange (NYSE), Company E, Inc.,
Obviously, if your limit price is "away from the market," (ticker symbol: E). You would enter the order just as you
that is, not close to the prices at which the stock is cur- would for a Nasdaq-listed stock, but the trading process is
rently trading, you may not get the rapid fill that you a little different. Your broker still chooses where to send
would get with a market order. Just as with market orders, the order, but the broker has different choices. NYSE-list-
there are numerous market makers and ECNs competing ed stocks trade not only on the NYSE, but also on the
for the order. Your broker has a strong financial incentive Nasdaq InterMarketSM (formerly known as the Third
to send the order to the market maker or ECN that offers Market), several regional stock exchanges, and
the best chance of filling the order. After all, if the limit ATSs/ECNs. These different exchanges are connected via
order is not filled, your broker does not get a commission. the Consolidated Quotation System (CQS) which displays
If the limit price on your order is better than the best price quote information, and the Intermarket Trading System
currently in the market, then the market maker or ECN (ITS) which allows one exchange to send trading interest
with the order is legally required to display that quote to another exchange. After the trade, the participants
through the Nasdaq system so that other investors can find report the trade details to the Securities Industry
out about it and perhaps trade with it. Also, under the Automation Corporation (SIAC), which disseminates the
Manning rules (named after an arbitration case that estab- information to the outside world through data vendors.
lished the rule), a customer order takes precedence over Just as with Nasdaq trades, a trade in an NYSE-listed stock
market makers trading for their own inventory, so that a settles through DTCC.
market maker holding a customer order has to fill that
order if it trades at the same price or better. Stock Markets in the U.S.
The largest primary stock markets in the United States are
After the trade is executed, the parties to the trade report The Nasdaq Stock Market (Nasdaq), the New York Stock
the trade to Nasdaq, which transmits the information to Exchange (NYSE), and the American Stock Exchange
the outside world through data vendors. The trade details (Amex). The companies that issue stock to the public
are passed on to Depository Trust and Clearing Corporation choose where they will list their stock for trading. This

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Foreign Stocks in the U.S.
Investors can buy shares in hundreds of leading foreign companies just as easily
as they can buy stocks in U.S. companies through American Depository Receipts
(ADRs). Normally, it is difficult and expensive for U.S. investors to trade foreign CMCSK CMVT CNXT COST CPWR CSCO CTAS CTXS
shares because they would have to deal with foreign markets that are open at
different times, and then deal with the problems of settling trades in other
countries in different currencies. An ADR program simplifies the process dra-
matically. An ADR is a U.S. security issued by a bank that represents an owner- means that they apply to have their shares traded on the
ship interest in the foreign security. Unlike the foreign security, the ADR trades
in the U.S. just like a regular U.S. stock. ADR trades can be executed easily market and are willing to abide by the investor protection
through regular brokerage channels and are denominated in dollars.
Furthermore, shareholders receive their annual reports in English and receive
rules of that market. In addition, they must prove that they
their dividends in U.S. dollars. meet the listing requirements for that market, as well as pay
a listing fee to the chosen market.

An investor may trade shares in some companies that are

not listed on any market. These companies either do not
qualify for trading on a stock market, or they have decid-
ed for other reasons not to apply for listing. An over-the-
counter (OTC) security, generally, is any equity that is not
listed or traded on a national securities exchange or mar-
ket. Such issuing companies, if they have filed registration
Depository Trust and Clearing statements with the Securities and Exchange Commission

Corporation (DTCC) (SEC), can be traded on the OTC Bulletin Board®

Although some investors may think that a trade is finished immediately after
(OTCBB), which carries dealer quotes for those stocks.
they click "place order," it really isn’t. A job is never finished until the paper-
work is done. Even though the buyer and seller have agreed on the price and
quantity to be traded, the money has not yet been exchanged for shares of
stock. This process, called settlement, usually takes place in the United States Stock Markets in the U.S. by
on the third business day after the trade, fondly known as "T+3." The Depository
Trading Volume, 2001
Trust and Clearing Corporation (DTCC) handles the post-trade processing that
results in the exchange of cash for the shares. DTCC also operates a vault
Total Share Volume
underneath Manhattan that stores most of the physical stocks and bonds in the MARKET (in thousands of shares)
United States. If you leave your stock in a brokerage account, where it is held
in street name, your brokerage firm usually stores the stock in its account at The Nasdaq Stock Market 471,216,589 56.42%
DTCC. Thus, when the time comes to deliver the stock to another investor, the New York Stock Exchange 307,509,256 36.82%
transaction can be done through a simple book-entry on DTCC’s computers, Chicago Stock Exchange 30,374,550 3.64%
without having to move physical paper stock certificates. This reduces costs American Stock Exchange 16,316,745 1.95%
substantially. Boston Stock Exchange 6,287,000 0.75%
Philadelphia Stock Exchange 2,100,000 0.25%
Pacific Exchange 1,452,965 0.17%
Total 835,257,105 100.0%
Sources: Nasdaq, NYSE, Chicago, Boston, Pacific

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Although Nasdaq operates the Bulletin Board, the OTCBB How the Different Markets Work
serves as a fully separate quotation medium for subscrib- The Nasdaq Stock Market
ing members, not an issuer listing service, and should not The Nasdaq Stock Market trades the most stocks and
be confused with the Nasdaq market. OTCBB securities reports the highest share volume of any U.S. stock market.
are traded by a community of market makers that enter The basic philosophy of Nasdaq is one of "open architec-
quotes and trade reports through a highly sophisticated, ture." Participation is not limited to any fixed number of
closed computer network, which is accessed through participants. Any firm that meets the basic requirements
Nasdaq Workstation IITM. The OTCBB is unlike Nasdaq in can join. This allows a large number of firms with widely
that it does not impose listing standards, does not provide different business models and trading technologies to plug
automated trade executions, does not maintain relation- into the Nasdaq network and compete on an equal basis.
ships with quoted issuers, and does not have the same
obligations for market makers. Investors may also trade
Ten Largest Nasdaq Market Makers, 2001
the shares of companies that are not even registered with
the SEC, through the Pink Sheets LLC, a privately owned Market # of Nasdaq Total
company whose Electronic Quotation Service provides an Participant Issues Share
MARKET MAKER Identifier Traded Volume (000s)
Internet-based, real-time quotation service for OTC equi-
ties and bonds. Knight Securities NITE 4,122 27,760,571
Salomon Smith Barney Inc. SBSH 1,149 22,056,105
Morgan Stanley & Co., Inc. MSCO 1,302 21,958,196
Investors can and do trade stocks in a variety of different Schwab Capital Markets L.P. SCHB 1,982 21,176,533
Merrill Lynch, Pierce, Fenner MLCO 962 19,860,470
markets, regardless of where the stock is officially listed. Goldman, Sachs & Co. GSCO 529 18,744,320
Thus, one can trade an NYSE-listed stock not only on the Credit Suisse First Boston Cp FBCO 712 17,951,191
Herzog, Heine, Geduld, LLC HRZG 3,766 16,578,127
NYSE, but also through the Nasdaq InterMarket or the Spear, Leeds, & Kellogg SLKC 4,337 15,228,529
Lehman Brothers Inc. LEHM 665 12,983,104
regional stock exchanges such as Boston, Chicago,
Cincinnati, Philadelphia, and Archipelago (launched in
2002 through the union of the Pacific Exchange and These participants include over 300 market makers, who
Archipelago ECN). However, the NYSE and the American operate much like shopkeepers, buying inventory to sell to
Stock Exchange have chosen to trade only stocks that offi- their customers. Market makers, also known as dealers to
cially list on their own exchanges. their customers, add liquidity by being willing to buy or
sell the stock for their own account at all times. Market
makers in a particular stock are required at all times to

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Who Regulates the Market?


post their bid and ask prices into the Nasdaq network,
where they can be viewed and accessed by all participants.
This means that there will always be someone willing to
buy when you want to sell, and someone willing to sell
when you want to buy, so that your trades can be filled
A stock market needs a good police force to keep the criminals out. Financial
markets are natural magnets for crime because of the large amount of money quickly and efficiently. The average Nasdaq stock has over
involved. Fraudsters may try to sell stock in bogus companies to unsuspecting
investors. Other criminals might be tempted to manipulate the stocks of legiti- 10 market makers.
mate companies illegally for their own gain.

Multiple levels of regulation protect investors in the U.S. In addition to the In addition to traditional market makers, the Nasdaq net-
normal civil and criminal prohibitions on fraud, the selling of securities in the
United States is highly regulated by the state and federal governments. The work also connects other trading systems such as
SEC is charged with the primary task of policing the stock market. The SEC has ATSs/ECNs and the Primex Auction SystemTM.
broad powers under U.S. securities laws to set rules, police stock exchanges,
and punish evildoers who would besmirch our markets. ATSs/ECNs provide electronic facilities for investors to

However, U.S. securities law realizes that the government can’t do the job
trade directly with each other at pre-set prices, without
alone, and so it relies heavily on self-regulation of the industry. The idea is going through a market maker. They operate simply as
that the financial services industry understands its business better than the
government, so that the industry itself can set up an organization that sets the order-matching mechanisms and do not maintain inven-
rules of conduct and takes action against those who break the rules.
tories of their own. For those market orders or marketable
In the United States, all brokerage firms must belong to a self-regulatory orga- limit orders seeking price validation, Nasdaq offers the
nization (SRO). It is up to the SRO to monitor the activities of its members to
make sure that they are in compliance with the appropriate rules and regula- Primex Auction System. Primex replicates a competitive
tions. If the SRO finds that someone has violated the rules, it can fine them or trading crowd in an extended digital environment. Any
even expel them from the business.
Nasdaq market participant, including market makers,
Stock markets such as Nasdaq, the NYSE, and the Amex are SROs because they
must monitor the trading in their markets to prevent shenanigans. These mar- order-entry firms, and ATSs/ECNs, may voluntarily
kets devote a large number of resources to policing the trading in their markets. expose orders to the system's electronic crowd of bidders,
NASD serves as the SRO for brokerage firms that are not members of the NYSE. who compete for the execution. Primex is available for
Not only do firms need to be members of an SRO, but also individual brokers
must be registered, be fingerprinted, and pass an examination. NASD
Nasdaq-listed securities and exchange-listed securities
Regulation, a subsidiary of the NASD, maintains the qualification, employment, traded in the Nasdaq InterMarket. Nasdaq has an exclusive
and disclosure histories of the more than half-a-million registered securities
employees of member firms through the automated, electronic Web Central license with Primex Trading N.A., LLC, to operate the
Registration Depository (CRDSM) system. Access to Web CRD is available
Primex Auction System as a facility of its market for U.S.
through the NASDR web site,

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The flexibility of the Nasdaq network means that innova- Nasdaq was developed by the National Association of
tors with new trading technologies or strategies can imple- Securities Dealers, Inc. (NASD) to improve the trans-
ment them quickly in the Nasdaq marketplace. Some of parency of what was then known as the over-the-counter
these innovators succeed, and some do not. market for unlisted stocks. The name Nasdaq was origi-
nally an acronym for National Association of Securities
The Nasdaq Stock Market itself does not buy or sell stock. Dealers Automated Quotation system. Nasdaq began
What Nasdaq does is to provide systems that link all of the trading in 1971 and introduced the National Market
liquidity providers in a given stock together where they System (NMS), predecessor to the Nasdaq National
can compete with each other. Nasdaq also gathers the Market, in 1982. In 1985, Nasdaq launched the Nasdaq-
trade and quote information from all of these participants 100 Index, representing the largest non-financial domestic
and passes it on to data vendors who ship it out to the and international issues listed on The Nasdaq Stock
investment community. Note that as a fully computerized Market, based on market capitalization, and by 1995,
market, Nasdaq itself does not have a central trading floor. Nasdaq had surpassed the New York Stock Exchange in
It has a primary data center in Trumbull, CT, with a fully reported trading volume. In early 2000, NASD members
redundant back-up facility in Rockville, MD. Nasdaq’s voted overwhelmingly to restructure the organization and
headquarters are located in New York, NY, with additional give the green light to spin Nasdaq off and validate the
offices in Washington, DC; Rockville, MD; Chicago, IL; return of NASD to its original mission as a member-based
Menlo Park, CA and several international locations. organization. Nasdaq is now a private, for-profit corpora-
tion that is owned by its shareholders, who are mostly
Nasdaq operates two market segments – the Nasdaq major financial service firms. An IPO is likely.
National Market, which trades household-name stocks
such as Microsoft and Intel, and The Nasdaq SmallCap New York Stock Exchange
MarketSM for smaller stocks that are not yet big enough for On the New York Stock Exchange (NYSE), all trades in a
the Nasdaq National Market. Nasdaq also provides a single stock take place in a single physical location on the
venue for off-floor trading of exchange-listed stocks via NYSE’s trading floor in New York. At that location, a mem-
the Nasdaq InterMarket, connecting Nasdaq market par- ber of the exchange known as a specialist oversees the trad-
ticipants to the Intermarket Trading System (ITS)- the sys- ing in that stock. The specialist has an obligation to main-
tem used by the NYSE and all regional exchanges for tain a "fair and orderly market" and acts as both a market
directed orders between exchanges. maker and an auctioneer. Just as with Nasdaq market
makers, the specialist is required to post bid and ask quotes
at all times. The specialist also acts as an auctioneer try-

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What the Numbers Mean


ing to match the orders of other customers that are sent

to the NYSE floor. The specialist oversees the order book
of orders that are electronically routed to the floor of
the NYSE.

Virtually no newscast is complete without a quick update on the stock market.

Almost invariably, newscasters will mention what happened to "The Dow," and In addition to the specialist, there are numerous floor bro-
"The Nasdaq" indices. Actually, there are literally thousands of different indices
that try to measure what happened to the entire stock market or to different
kers who negotiate larger orders face-to-face for their cus-
groups of stocks. Here are some of the more common ones: tomers. Typically, a floor broker receives an order from a
brokerage firm and then walks over to the specialist post
Dow Jones Industrial Average
where the stock is traded. The floor broker then negotiates
The Dow Jones Industrial Average (DJIA), or "The Dow" is the oldest commonly
quoted index of stock prices in the United States. It consists of a simple aver- with the specialist and any other floor brokers interested in
age of the prices of 30 major U.S. stocks, including major household names like
Microsoft and Intel. Dow Jones and Company, publishers of the Wall Street the same stock to try to fill the order. Smaller orders on
Journal, picks the 30 companies and adds up the price of each stock and then
the NYSE are usually routed electronically to the special-
divides the sum by a number called the divisor. The divisor changes over time
in order to correct for the effects of stock splits and changes in the members of ist’s order book.
the index. Presently, all stocks included in the Dow are companies listed on the
NYSE or Nasdaq.

Nasdaq Composite New York Stock Exchange

Unlike the DJIA, which covers only 30 stocks, the Nasdaq CompositeSM Index Specialist Firms, 2001
covers all common stocks listed on Nasdaq – approximately 4,100 stocks. Each
# of % of
stock is weighted by its market capitalization, so that a large company like
Common Common % of
Microsoft has a larger weight in the index than a smaller company. The index Specialist Firm Stocks Stocks Volume
started out with a value of 100 in 1971.

S&P 500 LeBranche & Co. 591 23.0% 28.5%

The Standard and Poor’s 500 index contains 500 of the largest U.S. firms. Like Spear Leeds & Kellogg 502 19.5% 20.2%
the Nasdaq Composite Index, it is capitalization-weighted. This index is a Fleet Meehan 422 16.4% 18.3%
common benchmark for evaluating the performance of investment managers. Wagner Stott Bear 347 13.5% 16.0%
Van Der Moolen 308 12.0% 10.2%
Performance 134 5.2% 1.1%
Susquehanna 117 4.5% 2.8%
Lyden Dolan Nick & Co. 80 3.1% 1.5%
Walter N. Frank & Co. 74 2.9% 1.4%
Total 2,575 100.0% 100.0%


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NYSE membership is limited to 1,366 members, who col- to trade are sold as "seats." Membership is limited to 807
lectively own the NYSE. In order to become a member, regular members who transact business in equities and
one has to purchase a membership, called a "seat," from options, and 57 options principal members who execute
another member who wants to sell. Memberships have transactions in options only. The Amex is the second-
recently been selling in the neighborhood of $2 million. largest options exchange in the U.S., after the Chicago
Seats also may now be leased from their owner. However, Board Options Exchange. (The CBOE also trades a few
purchasing a seat does not mean that you get to sit down. equity products.) The Amex pioneered exchange traded
Few NYSE members actually sit down for long during the funds such as SPDRs (pronounced "spiders") and now
trading day. does a substantial business in such funds, while continuing
to operate a small equities business. In 1998, the American
The New York Stock Exchange traces its history back to Stock Exchange merged with the NASD, and continues to
1792, two years after the founding of the Philadelphia exist as an independent entity under the NASD family
Stock Exchange. With the signing of the Buttonwood of companies.
Agreement, 24 prominent brokers and merchants gathered
on Wall Street, agreeing to trade securities on a common Regional Stock Exchanges
commission basis. In 1817, the group adopted a constitu- Years ago, stock exchanges naturally sprang up in many
tion with rules for the conduct of business, naming the cities to accommodate the needs of local investors. Even
resulting group the New York Stock & Exchange Board, cities like Wheeling, WV and Spokane, WA at one time had
and in 1863, shortened the name to the New York Stock their own local stock exchanges. Advances in communica-
Exchange. In 1903, after occupying various sites in the tion, such as the telegraph and telephone, reduced the
same neighborhood near Broad and Wall Streets, the need for so many exchanges, and many of them merged
NYSE opened the trading floor on 18 Broad Street, where with other stock exchanges. However, a number of these
it still conducts business today. so-called regional stock exchanges still survive. Although
some of these exchanges have a few exclusive "local" stocks,
American Stock Exchange these exchanges mostly compete in the business of trading
The American Stock Exchange (Amex) evolved out of the the more active NYSE- and Nasdaq-listed stocks. The
brokers who stood on the curb outside the New York Stock regional exchanges resemble Nasdaq market makers more
Exchange to trade stocks that did not qualify for the NYSE. than the NYSE floor. Although some of the regional
Indeed, even after the brokers moved indoors in 1921, they exchanges still have physical trading floors, for the most
were known as The New York Curb Exchange. As on the part, their specialists are acting as dealers, filling electron-
NYSE, trading on the Amex is conducted through an ically submitted orders from retail firms. The regional
advanced centralized specialist system, and memberships exchanges include the Boston, Chicago, Cincinnati, Pacific,

The Nasdaq Stock Market Educational Foundation, Inc.

Extended-Hours Trading
The normal hours of operation of the U.S. stock market are currently from 9:30
a.m. to 4:00 p.m., Eastern Standard Time. However, investors can and do trade
stocks outside these hours through a variety of means. Many ECNs offer trad- AMAT AMCC AMGN AMZN APOL ATML BBBY BEAS
ing outside of regular hours, and one of the largest ECNs, Instinet, usually
operates around the clock. Some broker/dealers specialize in making markets
after the regular markets close. Some brokerage firms offer retail investors the
opportunity to participate in these after-hours trading sessions. The NYSE and Philadelphia exchanges. Interestingly enough, the
offers two after-hours crossing sessions. However, trading volume tends to be
Cincinnati Stock Exchange is located in Chicago. In late
very small (and bid-ask spreads very high) outside of regular market hours
because most investors want to trade when the rest of the market is open. 2001, the SEC approved the launch of the Archipelago
Exchange (ArcaEx), through the union of Archipelago
ECN and the Pacific Exchange (PCX). Under the agree-
ment, Archipelago will convert its advanced equity trading
system into ArcaEx, a regulated facility of the Pacific
Exchange, and a replacement for the PCX's current floor-
based equities marketplace.

Stock Trading and the Internet

Disclosure of Order Execution The Internet has revolutionized many industries.
and Routing Practices Indeed, it has revolutionized the stock market by allow-
ing investors to place orders directly from their own
Although your broker has a legal obligation to get the best execution possible,
it has a variety of choices in routing your order. For the investor, the exact PCs, which has brought brokerage commissions down
routing of an order is generally difficult to determine. In November 2000, the
dramatically. One question that naturally arises is
SEC adopted two rules to improve public disclosure of order execution and
routing practices. Under Rule 11Ac1-5, market centers that trade national mar- whether the Internet will replace existing stock markets.
ket system securities are required to make available to the public monthly elec-
tronic reports that include uniform statistical measures of execution quality.
Under Rule 11Ac1-6, broker/dealers that route customer orders in equity and This is not likely anytime soon for several good reasons.
option securities are required to make publicly available quarterly reports that,
among other things, identify the venues to which customer orders are routed The first is cost. The current markets are extremely effi-
for execution. In addition, broker/dealers are required to disclose to customers,
on request, the venues to which their individual orders were routed. By making
cient and provide extremely low transactions costs to
visible the execution quality of the securities markets, the rules are intended to investors. The transaction costs on auction sites such as
spur more vigorous competition among market participants to provide the best
possible prices for investor orders. eBay tend to be higher (as a percentage of the purchase
price) than the existing stock markets. The second rea-
son is investor protection. Stock markets are highly reg-
ulated to protect investors, and both Nasdaq and the
NYSE devote enormous resources to investor protection.
This does not mean, however, that the existing markets
will stay the same. The technology of trading has been
changing rapidly and will continue to do so.


The Nasdaq Stock Market Educational Foundation, Inc.

For more information

There are many good link collections on the web. Here are just a few of the many useful web sites where you can go for more information.

U.S. Stock Markets Brut NASD Regulation
American Stock Exchange GlobeNet North American Securities Administrators Association
Archipelago Exchange Instinet
Arizona Stock Exchange
Settlement Organization Island
Depository Trust and Clearing
Boston Stock Exchange Corporation
ITG Inc.
Chicago Stock Exchange Industry Organizations
American Association of Individual
Cincinnati Stock Exchange
The Nasdaq Stock Market Securities Industry Association
Nasdaq InterMarket Security Traders Association
OTC Bulletin Board
New York Stock Exchange Securities Training Corporation
Primex Trading
Pacific Exchange
Philadelphia Stock Exchange
Regulatory Agencies
ATSs, ECNs, and Trading
Facilities U.S. Securities and Exchange

Bloomberg Tradebook National Association of Securities Dealers

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account statement ask price

A written summary, provided by a brokerage to its customer, that The price at which an individual is willing to sell a security. Also
details all transactions made on behalf of that customer over the pre- referred to as "the ask."
ceding month, all interest and dividends received, and the current value
of the account. ask price (offer price)
The price at which a market maker is willing to sell a security. (See
Advanced Detection System (ADS) "market maker," "best ask.")
Automated surveillance system used by NASD Regulation’s Market
Regulation Department; ADS monitors any operational exceptions in assets
member firms’ trading and reporting that may have a negative impact Any possessions that have value in an exchange.
on the quality of the market information and processing.
Association of Publicly Traded Companies (APTC)
after-hours trading This organization, which is not connected with the NASD, provides
Trading after the hours a stock market has closed. (For all major U.S. publicly traded companies with a forum for addressing regulatory and
stock markets, after-hours trading is 4:00-6:30 p.m., Eastern Standard legislative issues that affect them. It was formerly known as the
Time). After-hours trading often takes place after the release of news NAOTC.
that could make the price of a stock rise or fall sharply after the close of
trading. Participation in the after-hours market is strictly voluntary and auction market
may offer less liquidity and inferior prices. A market in which buyers and sellers meet through a single specialist,
who, in a centralized location or "floor," matches incoming orders to
aftermarket buy and sell each stock. Specialists use the capital of their firm to repre-
Trading activity in a security immediately following its initial offering to sent a stock, but are not allowed to provide research or retail sales sup-
the public. port. Stock exchanges, like the New York Stock Exchange and the
American Stock Exchange, are auction markets. (See "dealer market,"
alternative trading system (ATS) "market maker," "specialist.")
Non-traditional, computerized trading systems that compete with or
supplement dealer markets and traditional exchanges. These private audit
trading systems; facilitate electronic trading in millions of shares of A professional examination of a company’s financial and accounting
public issues every day, but do not provide a listing service. ECNs are records to verify accuracy.
alternative trading systems; however, not all ATSs are ECNs. (See "elec-
tronic communications network.") Automated Confirmation Transaction (ACT) ServiceSM
An automated Nasdaq service that speeds the post-execution steps of
American Depository Receipt (ADR) price and volume reporting, comparison, and clearing of pre-negotiated
A negotiable certificate representing shares of a foreign security that trades completed in Nasdaq and OTCBB securities.
have been repackaged for trading on a U.S. stock market. The creation
of ADRs makes it easier for U.S. investors to buy shares of foreign-based bear and bull markets
corporations, because certificates, transfers, and settlement practices for A bear market is one in which prices are low or declining; a bull market
ADRs are identical to those for U.S. securities. is one in which prices are high or rising.

American Depository Shares (ADS) best ask

The actual share issued under an American Depository Receipt agree- The lowest quoted offer of all competing market makers to sell a partic-
ment. (See "American Depository Receipt.") ular stock at any given time. (See "market maker," "ask price.")

American Stock Exchange LLC (Amex) best bid

The American Stock Exchange® is the second largest floor-based securi- The highest quoted bid of all competing market makers to buy a partic-
ties exchange, as well as the second largest options exchange in the ular stock at any given time. (See "market maker," "bid price.")
United States, and is the only primary exchange that offers trading
across a full range of equities, exchange traded funds (ETFs) including best execution requirement
structured products and HOLDRSSM, and options. Amex was acquired The obligation of market makers, broker/dealers, and others to execute
by the National Association of Securities Dealers, Inc., in 1998. (See customer orders at the best price available at the time the trade is
"Curb Exchange.") entered.

appreciation bid price (buy price)

An increase in the basic value of an asset, such as a stock, bond, com- The quoted bid at which a market maker is willing to buy a stock. (See
modity, or real estate. "market maker," "best bid.")


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bid-ask spread Consolidated Quotation System (CQS)

The difference between the price at which a market maker is willing to An electronic service that provides quotations on issues listed on the
buy a security (bid), and the price at which the firm is willing to sell it New York and American Stock Exchanges, regional stock exchanges, and
(ask). The spread narrows or widens according to the supply and issues traded by market makers in the Nasdaq InterMarket. Nasdaq
demand for the security being traded. (See "inside spread/quote.") processes this data and provides it to its subscribers as the Composite
Quotation Service. The initials may be used either for the exchange sys-
blue-chip stocks tem or Nasdaq service. (See "Nasdaq InterMarket.")
A term generally applied to stocks of well-established companies that
are known for their track records of solid management, and which have Curb Exchange, Curb Market
excellent records of consistent profits and paying dividends to stock- Historical forebear of the American Stock Exchange. The loose associa-
holders. Generally, dividends of blue-chip stocks are relatively moderate tion of curbside merchants and auctioneers that operated in New York
in nature. was organized in 1908 as the New York Curb Agency. The Association
moved indoors in 1921 and was renamed The New York Curb Market
bond Association, and in 1953 was renamed the American Stock Exchange,
A long-term promissory note in which the issuer agrees to pay the which is still sometimes referred to in financial circles as "the Curb."
owner the amount of the face value of the bond on a future date and to (See "American Stock Exchange LLC.")
pay interest at a specified rate at regular intervals.
dealer market
broker A market in which many competing dealers, called market makers, use
An individual or firm who acts as an intermediary between a buyer and their own capital, research, retail, and/or systems resources to represent
seller, usually charging a commission. (See "dealer.") a stock. Many market makers can represent the same stock; thus, they
compete with each other to buy and sell that stock. Nasdaq is a com-
broker/dealer peting dealer market, as opposed to an auction market. (See "auction
NASD member firms that act as securities dealers or brokers, or per- market," "Market Maker.")
form both functions. (See "broker," "dealer.")
bull market The process that converted stock prices from fractional pricing to pric-
See "bear and bull markets." ing in decimals; that is, in increments from eighths or sixteenths of dol-
lars to nickels or pennies. Decimalization and the reduction of tick
capital sizes are not the same and are not necessarily dependent on each other.
The cash or goods used to generate income. Wealth in the form of
money or property, used or accumulated in a business by a person, depository bank
partnership, or corporation. When a company decides to issue American Depository Receipts, it
appoints an authorized depository, normally part of a large U.S. bank-
certificate of deposit (CD) ing institution or trust company. (See "American Depository Receipts.")
A debt instrument issued by a bank that usually pays interest.
Institutional CDs are issued in denominations of $100,000 or more, and Depository Trust and Clearing Corporation (DTCC)
individual CDs start as low as $100. Maturities range from a few weeks The DTCC, established in September 1999, is a holding company that
to several years. Interest rates are set by competitive forces in the mar- oversees two principal subsidiaries – The Depository Trust Company
ketplace. (DTC) and the National Securities Clearing Corporation (NSCC).
These two firms provide the primary infrastructure for the clearance,
clearance settlement and custody of the vast majority of equity, corporate debt,
The conclusion of an exchange of securities. (See "settlement.") and municipal bond transactions in the U.S. The DTCC is owned by its
principal users – major banks, broker/dealers, and other companies
common stock within the financial services industry, including the NASD and the
A class of securities representing ownership and control in a corpora- NYSE.
tion and that may pay dividends as well as appreciate in value. (See
"preferred stock.") dividend
Distribution of earnings to shareholders, prorated by the class of securi-
Computer Assisted Execution System (CAESSM) ty and paid in the form of money, stock, scrip, or, rarely, company prod-
Nasdaq service that automates order routing and execution for securi- ucts or property. The amount is decided by a board of directors and is
ties listed on domestic exchanges in the Intermarket Trading System usually paid quarterly. Mutual fund dividends are paid out of income,
(ITS). When linked to ITS, market makers can execute trades in usually on a quarterly basis from the fund’s investments.
exchange-listed securities through CAES with specialists on an exchange
floor. (See "Intermarket Trading System," "market maker," "specialist.")

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Dow Jones Industrial Average (DJIA) Generally Accepted Accounting Principles (GAAP)
A price-weighted average of 30 actively traded blue chip stocks, includ- Rules, conventions, standards, and procedures that are widely accepted
ing such companies as Microsoft, Intel, IBM, General Electric, and among financial accountants. Since 1973, GAAP doctrine has been
General Motors. Prepared and published by Dow Jones & Co., it is the established by the Financial Accounting Standards Board (FASB), an
oldest and most quoted of all the market indicators. Often referred to independent, self-regulating organization.
as "the Dow," it is calculated by adding the closing prices of the compo-
nent stocks and using a divisor that is adjusted for splits and stock divi- goodwill
dends equal to 10 percent or more of the market value of an issue, as The going-concern value of a company in excess of its asset value;
well as substitutions and mergers. The average is quoted in points, not goodwill is considered an intangible asset. Generally, it is the value of
dollars. the business’ good name, its customer relations, high employee morale,
and other factors that might translate into earning power. Nasdaq’s cal-
earnings per share (EPS) culation of net tangible asset value excludes goodwill.
The portion of a company’s profit allocated to each outstanding share
of common stock. holder
Owner of a security.
electronic communication network (ECN)
An electronic facility that matches customer buy and sell orders directly index
through a computer. ECNs act on behalf of customers and do not buy A market indicator, such as the Nasdaq Composite Index or the Dow
and sell from their own account. ECNs are alternative trading systems. Jones Industrial Average, which represents a measure of the relative
value of a combined group of stocks.
The ownership interest of stockholders in a company. Also, the excess
of the market value of securities over debit balances in a margin index fund
account. (See "margin.") A passively managed mutual fund that tries to match the performance of
a specific index by purchasing the same securities that are held by that
exchange index.
An organized marketplace in which stocks, common stock equivalents,
and bonds are traded by members of the exchange, acting both as bro- initial public offering (IPO)
kers and dealers/traders. Such exchanges have a location (either physical A company’s first sale of stock to the public. Companies making an IPO
or virtual) where brokers and dealers meet to execute orders from insti- are seeking outside equity capital and a public market for their stock.
tutional and individual investors and to buy and sell securities. Also (See "public company," "underwriter.")
known as "stock exchange."
inside spread (inside quote)
Exchange Traded Fund (ETF) The difference between the best bid and best ask being quoted among all
Shares of ownership in either fund, unit investment trusts, or deposito- of the market makers competing in a security. Since the inside spread is
ry receipts that hold portfolios of common stocks which closely track the aggregate of individual market maker spreads, it is narrower than an
the performance and dividend yield of specific indexes, either broad individual dealer spread or quote. (See "market maker.")
market, sector, or international. An entire portfolio of stocks in a single
security can be bought or sold as easily as buying or selling a share of interest
stock. While similar to an index mutual fund, ETFs differ in that they 1) The return made on an investment, usually expressed as an annual
are priced, and can be bought and sold, throughout the trading day. percentage; 2) The fee lenders charge borrowers for the use of loaned
Furthermore, ETFs can be sold short and bought on margin. Examples funds; 3) An individual’s share, right, or title in a company or property.
include DIAMONDS Trust Series I (DIA), Nasdaq-100 Index Tracking
Stock (QQQ), and SPDR Trust Series I (SPY). Intermarket Trading System (ITS)
A computer system that interconnects competing exchange markets for
fiscal year the purpose of choosing the best market. ITS is operated by the Securities
A 12-month period for which a business operates and reports its Industry Automation Corporation (SIAC). (See "Computer Assisted
income-earning activities. This period may or may not coincide with Execution System.")
the calendar year.
floor A person who buys or sells securities for his or her own account or the
The space where trading on a traditional stock exchange takes place. account of others.
Electronic markets, like Nasdaq, trade through vast computer networks,
rather than by meeting in a physical location. issuer
A corporation that has distributed to the public securities that are regis-
tered with the U.S. Securities and Exchange Commission (SEC).


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limit order Nasdaq InterMarketSM (formerly, Third Market)

An order to buy or sell a security at a customer-specified price; a cus- The Nasdaq InterMarket consists of Nasdaq market makers and elec-
tomer order to buy or sell a specified number of shares of a security at a tronic communications networks, which quote and trade NYSE and
specific price. (See "market order," "stop-loss order.") Amex® exchange-listed securities using their proprietary systems,
Nasdaq technology, and the Intermarket Trading System (ITS).
listing requirements Through Nasdaq’s Computer Assisted Execution System (CAESSM),
The minimum qualification standards a market requires for a company participants are linked with each other and with ITS, enabling them to
to list stock on that market. enter and execute trades in all exchange-listed securities via the Nasdaq
systems or an application programming interface (API). (See
liquidity "Computer Assisted Execution System," "Intermarket Trading System.")
The ease with which the market can absorb volume buying or selling in a
stock, without dramatic fluctuation in price. National Association of Securities Dealers, Inc. (NASD®)
The largest securities-industry, self-regulatory organization in the
margin United States. Through its subsidiaries, NASD Regulation, Inc, NASD
An account in which a customer purchases securities on credit extended Dispute Resolution, Inc., and the American Stock Exchange, the NASD
by a broker/dealer. Rules of the Federal Reserve Board and NASD govern develops rules and regulations, conducts regulatory reviews of mem-
margin accounts. bers’ business activities, disciplines violators, provides arbitration and
mediation services, and regulates securities markets for the benefit and
market maker protection of the investor. In 2000, NASD members voted to spin off a
A firm that maintains a firm bid and offer price in a given security by controlling interest in The Nasdaq Stock Market, Inc.
standing ready to buy or sell at publicly quoted prices. The Nasdaq Stock
Market is a decentralized network of competitive market makers (or New York Stock Exchange (NYSE)
dealers). Market makers process orders for their own customers and for The oldest stock exchange and the largest floor-based exchange in the
other NASD broker/dealers; all Nasdaq securities are traded through United States, the NYSE is an auction market, where buy and sell orders
market maker firms. There are four primary types of market-making for each listed security meet directly on the trading floor in assigned
firms: retail, wholesale, institutional, and regional. locations. (See "auction market," "floor," "specialist.")

market order NYSE Composite Index (NYSE)

An order to buy or sell a stated amount of a security at the best possible A market-value-weighted index that relates all NYSE stocks to an aggre-
price at the time the order is received in the marketplace. gate market value as of December 31, 1965, adjusted for capitalization
market price
The last reported price at which a security was sold on an exchange or offer price
market. See "ask price (offer price)."

material news order book

News released by a public company that might reasonably be expected Compiled list of orders received that are away from the current best
to affect the value of a company's securities or influence investors' deci- price in the market.
sions. Material news includes information regarding corporate events of
an unusual and non-recurring nature, news of tender offers, unusually OTC Bulletin Board® (OTCBB) Service
good or bad earnings reports, and a stock split or stock dividend. (See A regulated quotation service that displays real-time quotes, last-sale
"trading halt.") prices, and volume information in over-the-counter (OTC) equity secu-
rities. OTCBB is a quotation medium for subscribing members, not an
mutual fund issuer listing service, and should not be confused with The Nasdaq
Fund operated by an investment company that raises money from Stock Market.
shareholders and invests it in stocks, bonds, options, commodities, or
money market securities on the shareholders’ behalf. over-the-counter (OTC) securities
Securities that are not listed and traded on an organized exchange or
Nasdaq-100 Index® market and are generally not subject to the same requirements.
The Nasdaq-100 Index includes 100 of the largest non-financial domes-
tic companies listed on the Nasdaq National Market tier of The Nasdaq preferred stock
Stock Market. Launched in January 1985, each security in the Index is A security that usually pays a fixed dividend and that gives the holder a
proportionately represented by its market capitalization in relation to claim on corporate earnings and assets that is superior to that of hold-
the total market value of the Index. ers of common stock. (See "common stock.")

The Nasdaq Stock Market Educational Foundation, Inc.


price/earnings ratio (price-to-earnings or P/E ratio) exchanges, brokers and dealers, and registration of exchange-listed secu-
The price of a share of a stock divided by earnings per share (EPS), usu- rities; it also required disclosure of certain financial information and
ally calculated using the latest year’s earnings. The P/E ratio is also insider activity. The law gave the SEC surveillance authority over
called the "multiple." exchanges and brokers, and the authority to regulate margin require-
ments. The law also authorized the SEC to enforce the Securities Act of
primary market 1934 to allow regulation of over-the-counter markets through national
The market in which a company initially sells newly issued shares to associations registered with the SEC. The NASD is the only association
investors, such as through an initial public offering. The primary mar- ever to register under the act.
ket provides promising companies with the capital they need to invest
in growing their businesses. Securities Industry Association (SIA)
The principal trade association and lobbying arm of the securities
publicly traded industry.
Term used to describe a company which has issued securities through
an offering and that are traded on an open market, such as a stock mar- Securities Industry Automation Corporation (SIAC)
ket. By issuing public shares, the company is relinquishing exclusive A facility owned by the New York and American Stock Exchanges, which
control of the company's future to its shareholders. operates automated communication systems to support trading, surveil-
lance and market data for these exchanges.
The measurable possibility an investment will lose or not gain value. Securities Investor Protection Corporation (SIPC)
A nonprofit corporation that insures investors against the failure of bro-
secondary market kerage houses. Coverage is limited to a maximum of $500,000 per
Markets where securities are bought and sold subsequent to original account, but only up to $100,000 in cash. SIPC does not insure against
issuance. Stock markets serve as secondary markets for shares of pub- market risk.
licly owned companies.
self-regulatory organization (SRO)
securities An entity responsible for regulating its members through the adoption
A broad range of investment instruments, including stocks, bonds, and and enforcement of rules and regulations governing the business con-
mutual funds. duct of its members.

Securities Act of 1933 settlement

The first act passed by Congress to regulate the securities markets. The The conclusion of a securities transaction — a broker/dealer buying
disclosure statute requires companies to register stock offerings to the securities pays for them, and a selling broker delivers the securities to
public and disclose important facts through a prospectus and additional the buyer’s broker.
information filed with the SEC. (See "Securities and Exchange
Commission.") settlement date (T+3, T+1)
The date specified for delivery of securities from one securities firm to
Securities Acts Amendments of 1975 another, often specified as T+x, where x equals the period of time in
Considered the most significant securities legislation since the 1934 Act, business days and T equals the trade date. Currently, the settlement date
this act ended fixed commission rates, initiated action toward develop- is three business days after the date of order execution (T+3).
ment of a national market system, and granted the SEC final say in the
adoption of rules by any of the SROs. (See "Securities and Exchange share
Commission," "self-regulatory organizations.") A single unit of ownership in a corporation (also called a "stock").

Securities and Exchange Commission, U.S. (SEC) specialist

The federal agency created by the Securities Exchange Act of 1934 to A member of a stock exchange through which all trades in a given secu-
administer that act and the Securities Act of 1933. The statutes adminis- rity pass.
tered by the SEC are designed to promote full public disclosure and
protect the investing public against fraudulent and manipulative prac- S & P 500
tices in the securities markets. Generally, most issues of securities A capitalization-weighted index (shares outstanding multiplied by stock
offered in interstate commerce or through the mail must be registered price) of 500 stocks that are traded on the New York Stock Exchange,
with the SEC. American Stock Exchange, and Nasdaq National Market. (See "index,"
"Standard and Poor’s Corporation.")
Securities Exchange Act of 1934
This law created the Securities and Exchange Commission to regulate
the securities industry. The law outlawed manipulative and abusive
practices in the issuance of securities; it required registration of stock


The Nasdaq Stock Market Educational Foundation, Inc.


Standard & Poor’s Corporation the automatic execution system on a proprietary basis for transactions,
A company well known for its rating of stocks and bonds according to enable system interaction with a market maker’s reserve size, increase
investment risk (the Standard & Poor’s Rating) and for compiling the efficiency of trading, and deliver executions as opposed to orders.
Standard & Poor’s Index, commonly called the S&P 500, that tracks 400
industrial stocks, 20 transportation stocks, 40 financial stocks, and 40 The Nasdaq Stock Market®
public utilities as a measurement indicative of broad changes in the The Nasdaq Stock Market® is a major national and international stock
market. market that uses computers and telecommunications for the trading
and surveillance of thousands of securities. As the world's largest elec-
stock tronic stock market, Nasdaq® is not limited to one central trading loca-
An instrument that signifies an ownership position in a corporation. tion. Rather, trading is executed through Nasdaq's sophisticated com-
(See "common stock," "preferred stock," "share.") puter and telecommunications network of competing market maker
firms that list specific prices for the sale or purchase of securities. This
stock dividend network transmits real-time quote and trade data to more than 1.3 mil-
Payment of a corporate dividend in the form of stock rather than cash. lion users in 83 countries. Without size limitations or geographical
The stock dividend may be additional shares in the company, or it may boundaries, Nasdaq's "open architecture" market structure allows a vir-
be shares in a subsidiary being spun off to shareholders. Stock divi- tually unlimited number of participants to trade in a company's stock.
dends are often used to conserve cash needed to operate the business.
Unlike a cash dividend, stock dividends are not taxed until sold. ticker symbol
The standard abbreviation used to identify a stock.
stop-loss order
A customer order to a broker that sets the sell price of a stock below the trading floor
current market price, therefore protecting profits that have already been Main area of an exchange where orders and active trading are executed.
made or preventing further losses if the stock drops. (See "limit order," Also just called "the floor."
"market order.")
trading halt
street name The temporary suspension of trading in a security while material news
Term given to securities held in the name of a broker on behalf of a from the issuer is being disseminated. A trading halt generally lasts
customer. This arrangement allows shares to be transferred easily. If approximately 30 minutes after complete news coverage and gives all
the stock were registered in the customer’s name rather than the bro- investors equal opportunity to evaluate news and make buy, sell, or hold
ker’s name, physical certificates would need to be transferred. decisions on that basis. A trading halt may also be imposed for regula-
tory reasons, or to stop a rapidly declining market. (See "material
SuperMontage news.")
The next-generation electronic trading system in both order display and
execution for Nasdaq securities, launched by The Nasdaq Stock Market QQQ
in mid-2002. The new trading system provides a fully integrated order Ticker symbol for the Nasdaq-100 Index Tracking Stock. (See
display and execution platform, aggregating quotes and orders to pro- "Exchange Traded Fund.")
vide access to more possible trades. SuperMontage will be capable of
handling an expanded universe of orders and, in its final state, will pro- underwriter
vide a completely rebuilt market platform that can seamlessly accom- An investment banker that assumes the risk of bringing a new securities
modate future enhancements and upgrades. Via its enhanced depth issue to market. The underwriter will buy the issue from the issuer and
and transparency and multiple options for execution, SuperMontage guarantee sale of a certain number of shares to investors, which is called
provides a natural center of liquidity, allowing users to take advantage firm-commitment underwriting. To spread the risk of purchasing the
of technological efficiencies. issue, the underwriter often will form a syndicate (underwriting group,
purchase group) among other investment firms.

The primary order routing and automatic execution system for Nasdaq
National Market securities. A result of the integration of Nasdaq’s
Small Order Execution SystemSM (SOESSM) and SelectNet® automated
trade execution systems, the system is designed to expand significantly
the earlier systems’ order capacity capabilities. The modifications to Designed by:
Nasdaq’s execution services were developed to reduce dual liability and
message traffic, re-establish SelectNet as a non-liability system for pur- B u r n e t t G r o u p
poses of order delivery and negotiation, allow market makers to use

Copyright 2002, The Nasdaq Stock Market, Inc. All rights reserved. All noted trade/servicemarks are trade/servicemarks of The Nasdaq Stock Market, Inc. or one of its affiliates.

The Nasdaq Stock Market Educational Foundation, Inc.


Published by
The Nasdaq Stock Market Educational Foundation, Inc.